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Retail Sector Technical Breakdown and Report


Today the retail sector posted a gain that was double what most analysts had expected for month-over-month sales in September.

Today the retail sector posted a gain that was double what most analysts had expected for month-over-month sales in September at 1.1%. This is also the greatest gain in retail sales in seven months.

Retail is a great indicator of the health of the economy as consumer spending accounts for anywhere from 60% to 70% of GDP. The retail sector is perceived as a leading indicator for the stock market – the theory being that consumers are the first to feel the ebb and flow of economic conditions in their paychecks. An increase in hours, pay, or new jobs gives consumers greater disposable income, while cuts in hours, pay, or loss of jobs instantly eats into their disposable incomes. It should be noted that the retail sector relies heavily on disposable income to drive sales, versus, for example, the consumer staples sector where disposable income plays a muted role.

By looking specifically at the retail sector, technical analysts will be able to gather bits of data about this area of the economy. When viewed within the context of the September retail report released today, the price action will provide even more information as to what is going on with the market. It is always important to dig deep and listen to what the market is telling you, and this is the work of a skilled technical analyst. Let's take a look.

The chart below is (XRT) -- the S&P Retail Select SPDR. This ETF is a basket of retail stocks. The five biggest components of XRT are: Apparel Retail (31%), Specialty Stores (15%), Automotive Retail (13%), Food Retail (8%), and Department Stores (8%). You can see from the chart below that XRT took out its September highs and cleared 50. This is a key resistance level for the sector because it was previously support that had turned into resistance as well as the 50% level retracement from the July high to August low. (Retracements tend towards 38.2%, 50%, and 61.8% -- the Fibonacci numbers.) This is a certainly a bullish indication for the retail sector, however now the sector is running into resistance at the upper blue line established from highs in August and September.

The sloping resistance line and the support line drawn just below 50 are critical areas to pay attention to price action. The XRT is trading between support at 50 and upwards sloping resistance currently at 51, putting it in a tight spot. Should XRT break resistance above 51, it would be a bullish signal that would indicate the likelihood that prices will move higher as long as action is confirmed in the retail subsectors. Should the XRT break below the line at 50, it would indicate the bulls do not have the conviction of the breakout and signal a likely decline in prices – again with bearish confirmation. The situation creates an interesting and favorable risk/reward setup for both longs and shorts.

Now we'll examine the top holdings of the XRT in detail to look for confirmation.

The chart below is the Dow Jones US Apparel Retailers Index. Remember this is the largest component of XRT at 31%. You can see that this index has outperformed XRT itself and is one of the chief reasons why XRT has done so well recently. But notice that it, too, is in between a rock and a hard place. Action has overcome Fibonacci resistance but the price is also at resistance from the upper blue trendline. It will be interesting to watch this Index as it can be seen as the leading indicator of the leading indicator (Retail Sector).

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No positions in stocks mentioned.
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